TRUSTS

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There are two basic types of trusts: simple and complex. A simple trust is required to distribute all income it earns and is prohibited from distributing any of its principal. A trust is a complex trust if it can accumulate income or distribute principal.

Typically, for Estate Planning purposes, a complex trust is used because it allows more flexibility. For example, Medicaid Protection Trusts are complex trusts, since they give the Trustee discretion whether to distribute income, principal, or both.

The attorneys at Losavio & DeJean can help you determine which type of trust is best for your wants and needs.

TYPES OF TRUSTS EXPLAINED

LIVING TRUST (Revocable Inter Vivos Trust)

Commonly referred to as a “Living Trust,” a Revocable Inter Vivos Trust is a great probate avoidance tool. A person may place his assets into the trust and maintain complete access and control over them by naming himself the Trustee and the Beneficiary. At any time, the person can revoke the trust. This means that he can make any changes to the trust including a complete cancelation.

The disadvantage to this type of trust is that it offers no asset protection.

SPECIAL NEEDS TRUST

Very similar to a Medicaid Protection Trust, a Special Needs Trust is a Self-Settled and Irrevocable Trust established by the Settlor during his lifetime and for his own benefit. Typically, this kind of trust is used when a person already on government benefits – such as Medicaid or Social Security Disability – is expected to receive some asset(s) that will disqualify him for those benefits. By placing the assets in the trust, the Settlor can remain on the benefits.

This is both an Asset Protection Trust and a Spendthrift Trust, with extra provisions in the Trust Agreement providing that the Trustee may not pay any Beneficiary if the payments would cause that beneficiary to lose her government benefits – such as Medicaid or Social Security Disability. The Trustee cannot be the Settlor/Beneficiary.

SUPPLEMENTAL NEEDS TRUST

A Special Needs Trust established for another person’s benefit.

IRREVOCABLE TRUST

Commonly referred to as an “Irrevocable Trust,” this is actually another form of a Living trust (an Irrevocable Inter Vivos Trust) since it is established during the Settlor’s lifetime. This is also a great probate avoidance tool. A Settlor may place her assets into the trust and maintain complete access and control over them by naming herself the Trustee and the Beneficiary. However, unlike a Revocable Trust, the Settlor cannot revoke the trust.

This means that she cannot make any changes to the trust once it is established. Many people view this as a major disadvantage, but a well drafted trust document can allow for almost as much flexibility as a Revocable Trust.

Another disadvantage to this type of trust is that it offers little asset protection. This can be fortified, though by simply naming an independent Trustee who is not the Settlor.

ASSET PROTECTION TRUST

An Asset Protection Trust is simply a type of Irrevocable Trust with special provisions in the Trust Agreement which provide greater protection for the assets in trust. It is a special kind of Irrevocable Trust protecting the assets in the trust from the Beneficiary’s past, current, and future creditors. Most Asset Protection Trusts are also Spendthrift Trusts.

TESTAMENTARY MEDICAID PROTECTION TRUST

A Medicaid Protection Trust established for the benefit of another person – typically a surviving spouse – by the terms of the Settlor’s Last Will and Testament.

By federal law, this Medicaid Protection Trust is effective immediately, so there is no five-year (5 year) waiting period.

SPENDTHRIFT TRUST

A Spendthrift Trust is a special kind of Irrevocable Trust which prevents the Beneficiary from wasting the assets by diminishing or temporarily preventing the Beneficiary’s access to the funds. Many give the Trustee the discretion whether to pay the Beneficiary. The Trust Agreement contains additional language declaring it to be a “spendthrift trust.”

MEDICAID PROTECTION TRUST

A Medicaid Protection Trust is an advanced and complex type of Irrevocable Trust with special provisions in the Trust Agreement which provide the greatest protection for the assets in trust. This trust is established while the Settlor is living, and is for her own benefit (she is also the Beneficiary).

This is both an Asset Protection Trust and a Spendthrift Trust, with extra provisions in the Trust Agreement providing that the Trustee may not pay any Beneficiary if the payments would cause that beneficiary to lose her government benefits – such as Medicaid.

The Trustee cannot be the Settlor/Beneficiary, and the Trust Agreement contains very specific language required to comply with the Federal and State Medicaid Regulations. The trust will be effective for asset protection against all creditors except Medicaid/DHH upon signing. The trust is not effective for asset protection against Medicaid/DHH, however, until 5 years after being established. Therefore, it is important to plan ahead.

TESTAMENTARY SUPPLEMENTAL NEEDS TRUST

A Supplemental Needs Trust established for the benefit of another person – typically the Settlor’s child – by the terms of the Settlor’s Last Will and Testament.

This places the child’s inheritance into the trust so the child can remain on or qualify for government assistance.

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